Does this year's divergent performance of developed and emerging markets suggest the two are drifting apart? No, according to one fund manager, but he admits the link has got more complex.
“Developed and emerging economies haven’t decoupled, but their relationship is facing new constraints,” says Morgan Harting, emerging market multi asset portfolio manager at AllianceBernstein.
In the past decade, writes Harting, a 1% rise in industrial production in developed markets has tracked a 2.4% rise in emerging market industrial production. Yet this year, developed market production has recovered to a growth rate of about 5% while emerging market production continues to stagnate, currently at about 2%, according to Harting's figures.
Harting suggests a number of reasons why this has happened. The US recovery, for instance, driven as it is by housing, shale gas and domestic car production, has mostly pushed up domestic consumption rather than emerging market imports. Growth in the technology sector has been relatively slow, meaning no large increases in electronics imports from the likes of Taiwan and South Korea.
Meanwhile, emerging markets have struggled to maintain productivity gains. In China, rising wage costs and a decline in the migration of workers from rural areas to factories has eroded the country's labour-cost advantage.
“The emerging market sluggishness has sparked a fervent debate: Is this an anomaly that will soon correct or a longer-lasting structural problem?” asks Harting.
It may be little surprise that Harting, who manages emerging market portfolios, takes an optimistic view. He concludes that staying underweight in emerging market stocks poses a “substantial opportunity cost”, because even small gains in emerging market activity could drive outsize gains in emerging market stocks.
His optimism corresponds to comments made by Mark Mobius, executive chairman of Templeton Emerging Markets Group, who recently said emerging markets continue to offer good value, even amid the malaise of Federal Reserve tapering and worries about current account deficits in India, Indonesia and elsewhere.
However, each investor has admitted that emerging market investments are likely to be more volatile than in the past. Harting admits that navigating the emerging market landscape will be “trickier than it has been historically”, while Mobius has admitted that his emerging market holdings are likely to get hit should the market respond negatively to the Fed's imminent tapering.
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